VMware Sales Forecast Misses Estimates in Move to Cloud Software
by Dina Bass
3:15 PM CST
January 27, 2015
(Bloomberg) -- VMware Inc., the software maker whose parent company, EMC Corp., has been targeted by an activist investor, said 2015 sales will fall short of analysts’ estimates as currency fluctuations and the shift to Internet-based cloud software will hurt revenue.
Fourth-quarter results were better than expected as the company reported profit, excluding certain costs, of $467 million, or $1.08 a share. Revenue rose 15 percent to $1.7 billion, Palo Alto, California-based VMware said in a statement. Analysts on average had projected profit of $1.07 and sales of $1.69 billion, according to data compiled by Bloomberg.
VMware, the market leader in selling virtualization software that enables companies to save money by consolidating different applications on a single server, has been persuading customers to renew agreements and add tools for managing their software to the deals, Abhey Lamba, an analyst at Mizuho Securities USA Inc. with a buy rating on the stock, wrote in a note. Products for storage and networking are also getting added into contracts, he said.
“They had pretty solid renewals and their ability to attach management tools has been pretty strong,” Lamba said in an interview.
The company’s projections for 2015 didn’t meet those expectations. Sales for the first quarter will be $1.49 billion to $1.51 billion, VMware said on a conference call, compared with an average analyst estimate of $1.55 billion. Revenue for the full year is forecast at $6.64 billion to $6.76 billion, compared with the analysts’ estimate of $6.84 billion.
Currency Effect
A stronger U.S. dollar will lower sales by 2 percent in the year, said Chief Financial Officer Jonathan Chadwick. A shift to selling more software as Internet-based services and cloud programs will lower revenue because those deals have a smaller percentage of the sale recognized initially. The process is expected to reduce revenue 1 percent, he said.
“While this is a positive development for VMware, it also has the impact of recognizing less revenue up front,” Chadwick said of the shift to cloud software.
The company also authorized an additional $1 billion in share repurchases through 2017.
VMware shares fell 2.2 percent to $80.61 at the close in New York. The company rose 1.7 percent in extended trading to $82 at 5:47 p.m. New York time. Shares declined 8 percent last year.
Shareholder Pressure
Activist shareholder Elliott Management Corp. has been pressuring EMC to spin off faster-growing VMware, saying the parent is undervalued and the companies now compete and hinder each other’s opportunities. Earlier this month, Elliott and EMC agreed to a standstill agreement as EMC named two new Elliott-approved board members.
EMC’s board has been considering strategic options, including a spinoff, and held talks about a merger with Hewlett-Packard Co. that stalled over disagreements on price, people familiar with the matter said last in September.
EMC will report its quarterly results Thursday, one day later than planned after the company pushed off the report because of the snowstorm on the East Coast of the U.S.
To contact the reporter on this story: Dina Bass in Seattle at dbass2@bloomberg.net
To contact the editors responsible for this story: Pui-Wing Tam at ptam13@bloomberg.net Andrew Pollack, John Lear
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